Hi everybody, I would like to spend a few minutes discussing a topic of extreme importance when trading gold or silver. And I want you to listen closely because this is a Big Deal. Oftentimes we get so caught up with trying to find the perfect technical indicator we end up ignoring the most important aspect of trading: Price Action.
There a literally hundreds of indicators out there and traders so often concentrate only on those and not keeping track of what’s going on in the middle of the screen. The price action doesn’t lie and by concentrating on it, we can stay nimble and adapt our trading based on it.
For the beginning traders out there, when we talk about price action, we are referring to the movements that occur on a chart with the price. These movements can be vertical movements or horizontal movements.
Vertical movements occur when the price is making a strong move to the upside or a strong move to the downside. These vertical movements are what make up the trend of the chart. Horizontal movements occur in times where the price looks like it’s moving sideways on the chart or in an area with out a trend.
In the chart below (Gold / USD), we have identified areas where the price is making vertical price movements. Notice we have identified an uptrend with the letter “A” and a downtrend with a letter “B”. The reason why we want to identify vertical price movements is that these are the areas where we want to be either long or short gold. If we are long gold and the price action becomes vertical to the upside, we will profit from that movement. If we are short gold and the price action becomes a vertical to the downside, will profit from that movement.
It really is as simple as that.
In another Gold / USD chart below, we also identified areas of horizontal price movement as indicated by the sideways trend lines. Oftentimes these areas of sideways price movement can be identified by drawing upper and lower horizontal trend lines. It is during these sideways price movements that we should begin to look for opportunity’s to go long or short as the price begins to show a directional vertical movement either to the upside or to the downside. You can also see that sometimes these sideways moves are short and at other times they are long.
In both the examples above, we are using the 15 min. charts but the rules hold true for any time frame you are trading.
So now that we’ve got that down, the next key is to be able to find and identify the areas when this vertical price movement is going to occur. Generally, these vertical price movements occur after a period of a horizontal price movement or consolidation of the price in a sideways trend.
Notice in the chart below how the vertical uptrend “A” was preceded by a horizontal price movement and how the vertical downtrend “B” and “C” were also preceded by this sideways movement. You will also want to recognize that the sideways price movements do not always move exactly horizontal. Sometimes you will see them moving at a bit of angle as it did prior to letter “A” below.
Take some time to practice drawing these horizontal lines on your chart to identify these sideways movements. Also, look for the breakouts to occur as vertical movements to the upside or downside. As you become better at identifying these areas you will see an improvement in where you should be both entering and exiting your trades.
Remember, as we watch gold swing up and down, we can look for these areas to help us know when the best time to trade will be. By mastering the art of interpreting price action, you’ll become a better trader because you’ll be more “nimble” and able to get in and out at more profitable times.